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  1. 1. Chapter 3 Online Investing, Information, and Trading
  2. 2. Online Investing, Information, and Trading <ul><li>Learning Goals </li></ul><ul><ul><li>Discuss the growth in online investing, online sites and investment tools and the pros and cons of using the Internet as an investment tool. </li></ul></ul><ul><ul><li>Identify major types and sources of traditional and online investment information. </li></ul></ul><ul><ul><li>Explain and interpret commonly cited stock and bond market averages and indexes. </li></ul></ul><ul><ul><li>Review the roles of stockbrokers. </li></ul></ul><ul><ul><li>Describe the basic types of orders and legal aspects of investor protection. </li></ul></ul><ul><ul><li>Discuss roles of investment advisors and investment clubs. </li></ul></ul>
  3. 3. The Growth of Online Investing <ul><li>Internet has become major force in investing </li></ul><ul><ul><li>Makes investing more accessible to more people </li></ul></ul><ul><ul><li>Creates a more level playing field for investing </li></ul></ul><ul><ul><li>Provides access to sophisticated investment tools </li></ul></ul><ul><ul><li>Expected to grow from 14.3 million Internet users in 2000 to 32.4 million in 2004 </li></ul></ul><ul><ul><li>Easy, relatively simple, inexpensive and fast </li></ul></ul>
  4. 4. Online Investment Tools <ul><li>Investment Education Websites </li></ul><ul><ul><li>Offer tutorials, online classes and articles </li></ul></ul><ul><ul><li>Examples: Investing Online Resource Center , Investor , The Motley Fool </li></ul></ul><ul><ul><li>Eg. http:// / </li></ul></ul><ul><li>Investments Tools Websites </li></ul><ul><ul><li>Develop financial plans, set investment goals </li></ul></ul><ul><li>Planning Tools Websites </li></ul><ul><ul><li>Provides financial calculators </li></ul></ul><ul><ul><li>Example: https:// / </li></ul></ul>
  5. 5. Online Investment Tools <ul><li>Screening Tools Websites </li></ul><ul><ul><li>Sort through databases of stocks, bonds and mutual funds to find those with specific characteristics </li></ul></ul><ul><ul><li>Examples: http:// / </li></ul></ul><ul><li>Charting Tools Websites </li></ul><ul><ul><li>Plot performance of stocks over a specified time period </li></ul></ul><ul><ul><li>Examples: </li></ul></ul><ul><li>Stock Quotes and Portfolio Tracking Websites </li></ul><ul><ul><li>Obtain prices and track stock performance </li></ul></ul><ul><ul><li>Example: http:// /investor </li></ul></ul>
  6. 6. Pros and Cons of Using the Internet as an Investment Tool <ul><li>Exercise same cautions as regular investing. </li></ul><ul><li>Remember: there is no live broker to act as a “safety net.” </li></ul><ul><li>Be skeptical of “free” advice online. </li></ul><ul><li>Know what you are buying and from whom. </li></ul><ul><li>Watch out for frequent trading. </li></ul><ul><ul><li>High transaction costs </li></ul></ul><ul><ul><li>Higher taxes on short-term gains </li></ul></ul><ul><li>Beware of the risks of margin trading. </li></ul>
  7. 7. Types of Investment Information <ul><li>Economic and current events </li></ul><ul><li>Industry and company information </li></ul><ul><li>Information on alternative investment vehicles </li></ul><ul><li>Price Information </li></ul><ul><li>Information on personal investment strategies </li></ul>
  8. 8. Sources of Investment Information <ul><li>Economic and Current Event Information </li></ul><ul><ul><li>Finance Journals: Wall Street Journal, Barron’s, Investor’s Business Daily </li></ul></ul><ul><ul><li>General newspapers: The New York Times </li></ul></ul><ul><ul><li>Institutional News: Dow Jones, Bloomberg Financial Services, AP, UPI, CNN </li></ul></ul><ul><ul><li>Business Periodicals: Fortune, Forbes, Business Week, Money, Smart Money, Worth </li></ul></ul><ul><ul><li>Government Publications: Economic Report of the President, Federal Reserve Bulletin </li></ul></ul><ul><ul><li>Special Subscription Services: Kiplinger Washington Letter </li></ul></ul>
  9. 9. Sources of Investment Information (cont’d) <ul><li>Industry and Company Information </li></ul><ul><ul><li>General business periodicals: Wall Street Journal, Business Week, Forbes, Fortune </li></ul></ul><ul><ul><li>Trade publications: periodicals devoted to a specific industry </li></ul></ul><ul><ul><li>Regulation FD: requires critical company information to be disclosed simultaneously to investment professionals and public </li></ul></ul><ul><ul><li>Company Web sites </li></ul></ul><ul><ul><li>Stockholders’ Reports: report published annually by publicly held corporations </li></ul></ul><ul><ul><li>Form 10-K: annual statement filed with SEC by all companies with publicly traded stock </li></ul></ul><ul><ul><li> SEC-maintained website with free access to SEC filings </li></ul></ul>
  10. 10. Sources of Investment Information (cont’d) <ul><li>Industry and Company Information (cont’d) </li></ul><ul><ul><li>Comparative Data Sources: Dun & Bradstreet’s Key Business Ratios </li></ul></ul><ul><ul><li>Subscription Services: Standard & Poor’s Corporation, Moody’s Investor Services, Value Line Investment Survey </li></ul></ul><ul><ul><li>Brokerage Reports: research reports available to brokerage firm’s clients </li></ul></ul><ul><ul><li>Investment Letters: recommendations of experts in securities investment </li></ul></ul>
  11. 11. Sources of Investment Information (cont’d) <ul><li>Price Information </li></ul><ul><ul><li>Quotations: use ticker symbols to obtain current price data and statistics on companies </li></ul></ul><ul><ul><li>TV sources: CNN Headline News, MSNBC </li></ul></ul><ul><ul><li>Financial Portals: supersites on the Web that combine investing features with other personal finance features </li></ul></ul><ul><ul><li>Bond sites: online resources for bond and interest rate information </li></ul></ul><ul><ul><li>Mutual fund sites: online resources for mutual fund information </li></ul></ul>
  12. 12. Table 3.3 Symbols for Some Well-Known Companies
  13. 13. Sources of Investment Information (cont’d) <ul><li>Investment Discussion Forums </li></ul><ul><ul><li>Websites where investors can exchange opinions about stocks and investing strategies </li></ul></ul><ul><ul><li>Examples: Motley Fool, Yahoo! Finance </li></ul></ul><ul><li>Avoiding Online Scams </li></ul><ul><ul><li>Beware of stock manipulators posting false news or overly optimistic opinions. </li></ul></ul><ul><ul><li>Always know your source. </li></ul></ul><ul><ul><li>Beware of “pump-and-dump”—promoters who hype a stock and sell out on the inflated prices. </li></ul></ul><ul><ul><li>Beware of “get-rich-quick”—promoters selling worthless investments to naïve buyers. </li></ul></ul>
  14. 14. Sources of Investment Information (cont’d) <ul><li>Protect Yourself by Asking Three Key Questions: </li></ul><ul><ul><li>Is the investment registered? </li></ul></ul><ul><ul><li>Who is making the sales pitch? </li></ul></ul><ul><ul><li>Is it too good to be true? </li></ul></ul>
  15. 15. Understanding Market Averages and Indexes <ul><li>Reasons to use market averages and indexes </li></ul><ul><ul><li>Gauge general market conditions </li></ul></ul><ul><ul><li>Compare your portfolio performance to large, diversified portfolio </li></ul></ul><ul><ul><li>Study market cycles, trends and behaviors to forecast future market behavior </li></ul></ul><ul><li>Stock market averages and indexes measure the general behavior of stock prices over time </li></ul><ul><ul><li>Averages reflect the arithmetic average price behavior at a given point in time </li></ul></ul><ul><ul><li>Indexes measure the current price behavior relative to a base value set at an earlier point in time </li></ul></ul>
  16. 16. Understanding Market Averages and Indexes (cont’d) <ul><li>Dow Jones Industrial Average (DJIA) </li></ul><ul><ul><li>Most popular average </li></ul></ul><ul><ul><li>Comprised of 30 high quality, diversified stocks </li></ul></ul><ul><ul><li>Tracks overall market activity </li></ul></ul><ul><ul><li>Stock makeup can change to better reflect the broader stock market </li></ul></ul><ul><li>Dow Jones Transportation Average </li></ul><ul><ul><li>Comprised of 20 stocks, including railroads, airlines, freight forwarders and mixed transportation companies </li></ul></ul>
  17. 17. Understanding Market Averages and Indexes (cont’d) <ul><li>Dow Jones Utilities Average </li></ul><ul><ul><li>Comprised of 15 public utility stocks </li></ul></ul><ul><li>Standard & Poor’s 500 Composite Index </li></ul><ul><ul><li>Comprised of 500 stocks from major industry sectors </li></ul></ul><ul><ul><li>More broad-based and representative of overall market than DJIA </li></ul></ul><ul><ul><li>True index calculated from 1941–1943 base period closing market values </li></ul></ul><ul><ul><li>Standard & Poor’s provide seven other indexes for tracking specific industry sectors </li></ul></ul>
  18. 18. Figure 3.7 Major Stock Market Averages
  19. 19. Understanding Market Averages and Indexes (cont’d) <ul><li>NYSE Composite Index </li></ul><ul><ul><li>Includes all 3,100 or so stocks listed in NYSE </li></ul></ul><ul><li>AMEX Composite Index </li></ul><ul><ul><li>Includes all stocks listed on the AMEX </li></ul></ul><ul><li>Nasdaq OTC Composite Index </li></ul><ul><ul><li>Includes all 3,450 or so stocks traded on the Nasdaq system </li></ul></ul><ul><ul><li>Often used to track technology companies’ behavior due to large technology companies listed with Nasdaq </li></ul></ul>
  20. 20. Understanding Market Averages and Indexes (cont’d) <ul><li>Value Line Composite Index </li></ul><ul><ul><li>Includes all 1,700 or so stocks tracked by Value Line </li></ul></ul><ul><ul><li>Uses equal weighting to eliminate the bias of stocks with large total market values </li></ul></ul><ul><li>Wilshire 5000 Index </li></ul><ul><ul><li>Includes 5,000 stocks traded on NYSE, AMEX and OTC </li></ul></ul><ul><li>Russell 1000 Index </li></ul><ul><ul><li>Includes 1,000 largest companies </li></ul></ul><ul><li>Russell 2000 Index </li></ul><ul><ul><li>Includes 2,000 small companies </li></ul></ul>
  21. 21. Bond Market Indicators <ul><li>Bond Yields </li></ul><ul><ul><li>Total return on bond purchased at current price and held to maturity </li></ul></ul><ul><ul><li>Reported as annual rate of return </li></ul></ul><ul><li>Dow Jones Corporate Bond Index </li></ul><ul><ul><li>Calculated for utility bonds, industrial bonds and a composite bond average </li></ul></ul><ul><li>NYSE Bond Diary </li></ul><ul><ul><li>Daily statistics on number issues traded, advances, declines, and remained unchanged </li></ul></ul>
  22. 22. The Role of Stockbrokers <ul><li>Stockbrokers </li></ul><ul><ul><li>Act as intermediaries between buyers and sellers of securities </li></ul></ul><ul><ul><li>Typically paid by commissions </li></ul></ul><ul><ul><li>Must be licensed by SEC and securities exchanges where they place orders </li></ul></ul><ul><ul><li>Client places order, stockbroker sends order to brokerage firms, who executes order on the exchanges where firm owns seats </li></ul></ul><ul><ul><li>OTC orders are placed through Nasdaq system </li></ul></ul>
  23. 23. The Role of Stockbrokers (cont’d) <ul><li>Brokerage Services </li></ul><ul><ul><li>Primary service is to executive clients’ purchase and sale transactions at the best possible price. </li></ul></ul><ul><ul><li>Client’s security certificates often held in street name. </li></ul></ul><ul><ul><li>Street name: stock certificates issued in brokerage firm’s name, but held in trust for the client who actually owns them. </li></ul></ul><ul><ul><li>Research information is often provided on specific stocks or economic conditions. </li></ul></ul><ul><ul><li>Statements showing detailed account transactions are provided. </li></ul></ul>
  24. 24. Types of Brokerage Firms <ul><li>Full-Service Broker </li></ul><ul><ul><li>Offers broad range of services and products </li></ul></ul><ul><ul><li>Provides research and investment advice </li></ul></ul><ul><ul><li>Examples: Merrill Lynch, Salomon Smith Barney </li></ul></ul><ul><li>Premium Discount Broker </li></ul><ul><ul><li>Low commissions </li></ul></ul><ul><ul><li>Limited research or investment advice </li></ul></ul><ul><ul><li>Examples: Charles Schwab </li></ul></ul>
  25. 25. Types of Brokerage Firms (cont’d) <ul><li>Basic Discount Brokers </li></ul><ul><ul><li>Main focus is executing trades electronically online </li></ul></ul><ul><ul><li>No research or investment advice </li></ul></ul><ul><ul><li>Commissions are at deep-discount </li></ul></ul><ul><ul><li>Fast-growing; many traditional brokerage firms are adding online brokerage operations </li></ul></ul><ul><ul><li>Examples: E*Trade, Ameritrade </li></ul></ul>
  26. 26. Selecting a Stockbroker <ul><li>Find someone who understands your investment goals. </li></ul><ul><li>Consider the investing style and goals of your stockbroker. </li></ul><ul><li>Be prepared to pay higher fees for advice and help from full-service brokers. </li></ul><ul><li>Ask for referrals from friends or business associates. </li></ul><ul><li>Beware of churning: increasing commissions by causing excessive trading of clients’ accounts </li></ul>
  27. 27. Types of Brokerage Accounts <ul><li>Custodial Account : brokerage account for a minor that requires parent or guardian to handle transactions. </li></ul><ul><li>Cash Account : brokerage account that can only make cash transactions. </li></ul><ul><li>Margin Account : brokerage account in which the brokerage firms extends borrowing privileges. </li></ul><ul><li>Wrap Account : account that shifts investment decisions to a professional money manager and charges a flat annual fee. </li></ul>
  28. 28. Basic Types of Orders <ul><li>Odd-lot Orders </li></ul><ul><ul><li>Orders for less than 100 shares of stock </li></ul></ul><ul><li>Round-lot Orders </li></ul><ul><ul><li>Orders for a 100-share unit or multiples thereof </li></ul></ul><ul><li>Market Orders </li></ul><ul><ul><li>Order to buy or sell stock at best price available when order is placed </li></ul></ul><ul><ul><li>Fastest way to fill order </li></ul></ul>
  29. 29. Basic Types of Orders (cont’d) <ul><li>Limit Orders </li></ul><ul><ul><li>Order to buy at or below a specified price or to sell at or above a specified price </li></ul></ul><ul><ul><li>If price limits are not met, order is not filled </li></ul></ul><ul><li>Fill-or-Kill Order </li></ul><ul><ul><li>Limit order which is canceled if not filled immediately </li></ul></ul><ul><li>Day Order </li></ul><ul><ul><li>Limit order that expires at end of the day if not filled </li></ul></ul><ul><li>Good-’til-Canceled (GTC) Order </li></ul><ul><ul><li>Limit order that remains in effect for six months unless filled, canceled, or renewed </li></ul></ul>
  30. 30. Basic Types of Orders (cont’d) <ul><li>Stop-Loss (Stop) Orders </li></ul><ul><ul><li>Typically used to protect investors from stock price declines </li></ul></ul><ul><ul><li>“ Suspended” order is placed to sell a stock if price reaches or falls below a specified level </li></ul></ul><ul><ul><li>Orders can be day orders or GTC orders </li></ul></ul><ul><ul><li>Once activated, becomes a market order </li></ul></ul><ul><ul><li>Can also use stop orders to buy stocks, such as to limit risk on short sales </li></ul></ul><ul><li>Stop-Limit Order </li></ul><ul><ul><li>Order to sell stock at or better than specified price </li></ul></ul><ul><ul><li>Prevents sale at undesirable price </li></ul></ul><ul><ul><li>No sale may occur if price continues to decline </li></ul></ul>
  31. 31. Tips for Successful Online Trades <ul><li>Know how to place and confirm orders </li></ul><ul><li>Verify stock ticker symbols </li></ul><ul><li>Use limit orders </li></ul><ul><li>Check and recheck orders—you pay for typos </li></ul><ul><li>Don’t get carried away </li></ul><ul><ul><li>Follow a strategy </li></ul></ul><ul><ul><li>Don’t churn </li></ul></ul><ul><ul><li>Avoid or limit margin orders </li></ul></ul><ul><li>Open accounts with two brokers </li></ul><ul><li>Double-check orders for accuracy after completion </li></ul>
  32. 32. Trading Considerations <ul><li>Transaction Costs </li></ul><ul><ul><li>Fixed commissions used on small trades </li></ul></ul><ul><ul><li>Negotiated commissions may be used on large trades </li></ul></ul><ul><li>Securities Investor Protection Corporation (SIPC) </li></ul><ul><ul><li>Protects against broker financial failure </li></ul></ul><ul><ul><li>Limits up to $500,000 for securities and $100,000 for cash </li></ul></ul><ul><ul><li>Does not guarantee against churning or bad broker advice </li></ul></ul>
  33. 33. Trading Considerations (cont’d) <ul><li>Mediation </li></ul><ul><ul><li>Informal, voluntary dispute resolution process between a customer and a broker </li></ul></ul><ul><ul><li>Nonbinding if parties cannot agree </li></ul></ul><ul><li>Arbitration </li></ul><ul><ul><li>Formal dispute resolution process that requires customer and broker to present arguments before a panel </li></ul></ul><ul><ul><li>Binding arbitration requires customer to accept arbitration panel’s decisions and give up right to sue broker </li></ul></ul>
  34. 34. Using an Investment Advisor <ul><li>Advisors are required to be registered with SEC </li></ul><ul><ul><li>No law or regulatory body guarantees competence </li></ul></ul><ul><li>Look for advisors with experience </li></ul><ul><li>Look for advisors with professional designations </li></ul><ul><ul><li>Chartered Financial Analyst (CFA) </li></ul></ul><ul><ul><li>Certified Investment Management Analyst (CIMA) </li></ul></ul><ul><ul><li>Chartered Investment Counselor (CIC) </li></ul></ul><ul><ul><li>Certified Financial Planner (CFP) </li></ul></ul><ul><ul><li>Chartered Financial Consultant (ChFC) </li></ul></ul><ul><ul><li>Chartered Life Underwriter (CLU) </li></ul></ul><ul><ul><li>Certified Public Accountant (CPA) </li></ul></ul>
  35. 35. Paying an Investment Advisor <ul><li>Typical professional investment advice fees </li></ul><ul><ul><li>Small portfolios: annual fees between 2% and 3% of funds under management </li></ul></ul><ul><ul><li>Large portfolios: annual fees between 0.25% and 0.75% of funds under management </li></ul></ul><ul><li>Check the track record and reputation of advisor </li></ul><ul><li>Expect lots of questions from good advisor to assess your investing expertise </li></ul>
  36. 36. Investment Clubs <ul><li>Investments Clubs </li></ul><ul><ul><li>A legal partnership formed by investors to pool their knowledge and money. </li></ul></ul><ul><ul><li>Members make stock recommendations and analyze stock performance. </li></ul></ul><ul><ul><li>National Association of Investors Corporation (NAIC) assists in organizing clubs and provides educational tools. </li></ul></ul><ul><ul><li>NAIC has over 325,000 investors in over 28,000 investment clubs. </li></ul></ul>
  37. 37. Chapter 3 Homework <ul><li>Exercises (will NOT be collected) </li></ul><ul><ul><li>Text Website: Self-assessment quiz </li></ul></ul><ul><ul><li>End-of-Chapter CFA questions (Page 122) </li></ul></ul><ul><ul><li>End-of-Chapter Odd-numbered Discussion Questions and Problems </li></ul></ul><ul><li>Homework (will be collected and graded, due date to be announced) </li></ul><ul><ul><li>Excel with Spreadsheet (page 128) </li></ul></ul>